Question

"If Uber wants to temporarily take market share in a city, it can undercut Lyft's pricing and take an outsized chunk of market volume. And, given the ease and speed with which prices can be changed, the temptation to do so is virtually irresistible. Competitors don't stand still in the face of price cuts and naturally retaliate by matching or undercutting their rival's new price. In part, it's these kinds of price wars that have made profitability so elusive for Uber and Lyft. All of these factors combine to produce an industry in which prices will inevitably march lower and lower until they barely exceed costs, resulting in subsistence profits. In the example where an autonomous ride costs $1 to provide, we would expect the price of that ride to drift down to around $1.10, earning the ride-hailing company a similar 10\% margin." (Alton, 2019) Considering the above passage and following the I/O Model of above-average returns, a suitable strategy for Uber or Lyft is:

a. Acquire new resources.
b. Develop new services.
c Move to another industry.
d Develop new capabilities.

Answer 1

To achieve above-average returns and avoid profitability issues from ongoing price wars, ride-hailing companies like Uber or Lyft should develop new capabilities. This strategy helps in creating a competitive edge and sustaining business growth without solely relying on pricing.

Step-by-step explanation:

Following the I/O Model of above-average returns, the main answer for Uber or Lyft to withstand price wars and maintain profitability would be to develop new capabilities. By focusing on capabilities, they can differentiate their service, add value to their customers, and create a competitive advantage that is not solely based on price. Price wars, as exemplified by the airline industry, can lead to reduced profits and even drive companies out of business once an incumbent reclaims the market share and raises prices. Furthermore, a company like a messenger service reaping the benefits of lower gasoline prices illustrates that lower operational costs allow for expansion and increased supply without necessarily lowering prices. For ride-hailing companies, developing capabilities could involve enhancing customer service, expanding ride options, or investing in technology such as autonomous driving.In conclusion, in an industry where prices tend to gravitate towards the minimum, companies should strive to acquire new resources and develop new services to stand out. Innovation and diversification lead to a sustainable business model beyond competing on price alone. Thus, developing new capabilities is a strategic move to ensure above-average returns in a competitive market.